Forget McDonald's: 5 Reasons To Be Bullish On Arcos Dorados Holdings

Don't you wish you could go back in time an invest in McDonald's (NYSE:MCD) at virtually any point in history? MCD stock has screamed higher and paid generous dividends over a period of decades now, constantly rewarding and re-rewarding investors over and over again. They have continually managed to grow stores, grow menus, grow in popularity, grow per guest checks, grow their brand image, grow sales, grow earnings and most importantly for investors - grow their wallets.

And now they've gotten so big internationally that there are now over 33,000 restaurants in over 100 countries, with more restaurants internationally now than in the United States. So if you're going to invest in McDonald's, why not consider one of the international franchisees instead and cut out the middle man? Arcos Dorados Holdings (NYSE:ARCO) may be the better bet for Big Mac profits.

Arcos Dorados Holdings is Latin America's largest restaurant chain and the world's largest McDonald's franchisee. It has the exclusive right to own, operate and grant franchises of McDonald's restaurants in 20 Latin American and Caribbean countries and territories. So if you missed the opportunity to invest in McDonald's during its more rapid growth opportunity years - here's your second chance to try again as Arcos takes on South America with expected rapid growth reminiscent of the earlier years for McDonald's and with a cheap valuation. Of course, there's no such thing as a free lunch (even in a McDonald's), the perceived risks of ARCO being 100% abroad and exposed to a variety of cultures, political climates, currenciesand economies should also be kept in mind - the future may be a bit more difficult to forecast long term. Despite these challenges, ARCO's valuation and growth gets my vote as the better bet.

2012 Est.

2013 Est.

2012 Est.

2013 Est.

Sales

Sales

YOY Growth

EPS

EPS

YOY Growth

ARCO

3.85B

4.28B

11.1%

0.54

0.70

29.6%

MCD

27.48B

28.88B

5.1%

5.31

5.79

9.0%

(1) EARNINGS AND GROWTH

While ARCO and MCD have similar Price-to-earnings ratios (around 17 and 15 respectively), ARCO is clearly the more of a growth stock with double the expected 2013 sales growth and triple the expected earnings growth. Even as a value stock, ARCO trades around 3.3 price to book value while MCD trades at a nearly twice as expensive 6.24 price to book.

(2) SHORT TERM PRESSURE VS. DISCOUNT

MCD buyers prior to 2012 dating back every year for decades are sitting on top of sizable profits that risk fear of losing their long-term capital gains benefits going into next year. As such, there could be some extra selling pressure going into the end of the year. Meanwhile, ARCO has discount to IPO price (dividend risk on MCD) of 29% so not only do investors not have to worry about a lot of profit taking, but they get to get in for a nice discount to the IPO price of $17.00.

(4) LESS COMPETITION

In the United States, McDonald's has to compete with a large variety of wildly successful hamburger chains that don't even exist in Latin America. Take the successful Jack in the Box (NASDAQ:JACK) chain as an example. Not a single restaurant outside of North America yet in the United States they do over $2 billion worth of business that they are potentially taking away from McDonald's.

Don't get me wrong though. ARCO isn't without risks. The dividend payout yield is nearly half that of what MCD is. Regulatory scrutiny is always a challenge and concern with any foreign-based company. Political unrest, sudden unexpected changes in tax laws, or foreign currency collapse are all very real risks companies doing business in Latin America always potentially face based on history.

But if you want to invest in McDonald's and are comfortable shouldering a little more risk for more potential return, why not go with ARCO instead? The larger growth expectations, cheaper valuation, discount to IPO price, large opportunity ahead, smaller competition risk, and huge short interest all point to likely superior returns ahead versus MCD.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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